Thursday, August 29, 2013

Poverty and economics, by Daniel Little: How important should the
subject of poverty be within the discipline of economics? Some economists
appear to think it is a very small issue compared to the magnificent
mathematics of general equilibrium theory. Others believe that economics
should fundamentally be about the sources of human well-being and misery,
and that understanding poverty is absolutely fundamental for economics. How
should we try to sort this out?

The neoclassical free market purists stand at the other end of the garden.
The economists of the Chicago School put primary emphasis on the beneficent
effects of untrammeled market behavior, and they give little attention to
the "market imperfections" that poverty and deprivation represent. (The word
"poverty" does not occur in the index of John Van Overtveldt's good
intellectual history of the Chicago School,
The Chicago School: How the University of Chicago Assembled the Thinkers Who
Revolutionized Economics and Business.) Poverty seems to be viewed as a
normal and fair result of the workings of market institutions: some people
make large contributions and earn high income, and others make small or zero
contributions and earn low income.

The closing chapter of Milton Friedman's
Capitalism and Freedom is entitled "The Alleviation of Poverty." Here
Friedman admits that poverty is a problem, but conceives of only two
solutions: private charity (which he agrees will not work in a large complex
society) and direct transfers from tax revenues to payments to the poor
(which is limited by the willingness of citizens to provide taxes for this
purpose). The mechanism he prefers is a negative income tax: persons with
incomes below a given threshold would receive payments determined by their
income levels. "In this way, it would be possible to set a floor below which
no man's net income (defined now to include the subsidy) could fall" (192).

What this analysis leaves out is any consideration of the economic
mechanisms that produce poverty within an affluent society, and how
institutions could be adjusted so that poverty and inequality tended to fall
over time as a consequence of the normal workings of economic institutions.
Take race in America, for example -- a set of institutions that many
observers see as being crucial mechanisms in the production of urban
poverty. Writing in 1962, Friedman argues that racial discrimination in
employment is essentially impossible within a competitive market system (link).
But we now understand the geography and social structuring of poverty much
better. Racial segregation in housing has not disappeared; it has only
worsened. Low-quality and ineffective schools are concentrated in low-income
and racially segregated neighborhoods, so poor people have reduced
educational opportunities. Access to jobs is also constrained by geography
and educational opportunity. (Here is a recent post on the mechanisms of
racial disparities; link).
So it seems clear that our economy systematically reproduces poverty in
inner cities rather than reducing it. And the situation of rural poverty is
not substantially better.

This all has to do with the dynamics of income at the bottom end. But we
have also seen persistent widening of income at the top end. American
capitalism has produced ever-widening inequalities of income for at least
the past forty years. Consider these two graphs of income by percentile
provided by Lane Kenworthy:

So the idea that a properly functioning market economy will tend to reduce
poverty and narrow the extremes of income inequality has been historically
refuted -- at least in the case of American capitalism.

It is apparent that the ills of poverty are debilitating to the families who
experience it; their quality of life is dramatically lower than it needs to
be in an affluent society. So that is one reason for economists to give
higher priority to the study of the mechanisms and structures that reproduce
poverty in the United States. But there is a more systemic reason as well:
if 15% of all Americans live in poverty (46 million people), and if 22% of
children live in poor households (16 million children), this implies a huge
drain on the productive capacity of the American economy. Education, health,
and inclusion are important components of economic growth; and each of these
is harmed by the persistence of poverty. So economists ought to be in the
lead when it comes to placing a priority on poverty research.

We need to have a much more systematic understanding of the institutions and
structures through which access to income and the necessities of life is
created. And this implies that the mainstream might be well advised to take
counsel from structuralist economists like Lance Taylor. Here is how Taylor
describes the intellectual foundations of structuralist macroeconomics in
Reconstructing Macroeconomics: Structuralist Proposals and Critiques of the
Mainstream:

In the North Atlantic literature, structuralism's intellectual
foundations lie within a complex described by labels such as [original,
neo-, post-]-[Keynesian, Kaleckian, Ricardian, Marxian] which
nonmainstream economists have adopted; numerous variants exist in
developing countries as well. The fundamental assumption of all these
schools is that an economy's institutions and distributional
relationships across its productive sectors and social groups play
essential roles in determining its macro behavior. (1)

This emphasis on study of the concrete institutions embodied in a given
economy, and the distributive characteristics that these create, seems like
a very good starting point for arriving at a better understanding of the
economic foundations of poverty than we currently have.

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'Poverty and Economics'

Daniel Little:

Poverty and economics, by Daniel Little: How important should the
subject of poverty be within the discipline of economics? Some economists
appear to think it is a very small issue compared to the magnificent
mathematics of general equilibrium theory. Others believe that economics
should fundamentally be about the sources of human well-being and misery,
and that understanding poverty is absolutely fundamental for economics. How
should we try to sort this out?

The neoclassical free market purists stand at the other end of the garden.
The economists of the Chicago School put primary emphasis on the beneficent
effects of untrammeled market behavior, and they give little attention to
the "market imperfections" that poverty and deprivation represent. (The word
"poverty" does not occur in the index of John Van Overtveldt's good
intellectual history of the Chicago School,
The Chicago School: How the University of Chicago Assembled the Thinkers Who
Revolutionized Economics and Business.) Poverty seems to be viewed as a
normal and fair result of the workings of market institutions: some people
make large contributions and earn high income, and others make small or zero
contributions and earn low income.

The closing chapter of Milton Friedman's
Capitalism and Freedom is entitled "The Alleviation of Poverty." Here
Friedman admits that poverty is a problem, but conceives of only two
solutions: private charity (which he agrees will not work in a large complex
society) and direct transfers from tax revenues to payments to the poor
(which is limited by the willingness of citizens to provide taxes for this
purpose). The mechanism he prefers is a negative income tax: persons with
incomes below a given threshold would receive payments determined by their
income levels. "In this way, it would be possible to set a floor below which
no man's net income (defined now to include the subsidy) could fall" (192).

What this analysis leaves out is any consideration of the economic
mechanisms that produce poverty within an affluent society, and how
institutions could be adjusted so that poverty and inequality tended to fall
over time as a consequence of the normal workings of economic institutions.
Take race in America, for example -- a set of institutions that many
observers see as being crucial mechanisms in the production of urban
poverty. Writing in 1962, Friedman argues that racial discrimination in
employment is essentially impossible within a competitive market system (link).
But we now understand the geography and social structuring of poverty much
better. Racial segregation in housing has not disappeared; it has only
worsened. Low-quality and ineffective schools are concentrated in low-income
and racially segregated neighborhoods, so poor people have reduced
educational opportunities. Access to jobs is also constrained by geography
and educational opportunity. (Here is a recent post on the mechanisms of
racial disparities; link).
So it seems clear that our economy systematically reproduces poverty in
inner cities rather than reducing it. And the situation of rural poverty is
not substantially better.

This all has to do with the dynamics of income at the bottom end. But we
have also seen persistent widening of income at the top end. American
capitalism has produced ever-widening inequalities of income for at least
the past forty years. Consider these two graphs of income by percentile
provided by Lane Kenworthy:

So the idea that a properly functioning market economy will tend to reduce
poverty and narrow the extremes of income inequality has been historically
refuted -- at least in the case of American capitalism.

It is apparent that the ills of poverty are debilitating to the families who
experience it; their quality of life is dramatically lower than it needs to
be in an affluent society. So that is one reason for economists to give
higher priority to the study of the mechanisms and structures that reproduce
poverty in the United States. But there is a more systemic reason as well:
if 15% of all Americans live in poverty (46 million people), and if 22% of
children live in poor households (16 million children), this implies a huge
drain on the productive capacity of the American economy. Education, health,
and inclusion are important components of economic growth; and each of these
is harmed by the persistence of poverty. So economists ought to be in the
lead when it comes to placing a priority on poverty research.

We need to have a much more systematic understanding of the institutions and
structures through which access to income and the necessities of life is
created. And this implies that the mainstream might be well advised to take
counsel from structuralist economists like Lance Taylor. Here is how Taylor
describes the intellectual foundations of structuralist macroeconomics in
Reconstructing Macroeconomics: Structuralist Proposals and Critiques of the
Mainstream:

In the North Atlantic literature, structuralism's intellectual
foundations lie within a complex described by labels such as [original,
neo-, post-]-[Keynesian, Kaleckian, Ricardian, Marxian] which
nonmainstream economists have adopted; numerous variants exist in
developing countries as well. The fundamental assumption of all these
schools is that an economy's institutions and distributional
relationships across its productive sectors and social groups play
essential roles in determining its macro behavior. (1)

This emphasis on study of the concrete institutions embodied in a given
economy, and the distributive characteristics that these create, seems like
a very good starting point for arriving at a better understanding of the
economic foundations of poverty than we currently have.